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When Singapore Mercantile Exchange, the first pan-Asian commodity exchange, opened for business in February, it chose Ho Chi Minh City as the delivery benchmark for its pepper contract, constituting a fresh setback for India in its losing battle against Vietnam for supremacy as South-East Asia’s commodity hub.

Prices set on the Mumbai-based National Commodity and Derivatives Exchange Ltd (NCDEX) have traditionally moved the global pepper market, but now this edge is in danger of being lost.

“The new exchange is still in a nascent stage. But Vietnamese traders are aggressive. The warehouses as delivery points for the exchange are getting full,” said S Kannan, executive director at the Jakarta-based International Pepper Community, an inter-governmental association of pepper-producing nations.

The annual global pepper market is worth around $2 billion. Singapore Mercantile Exchange’s preference for Vietnam as the new market mover is an indication that the global market no longer considers India as an influential player due to its declining volumes.

This is the latest in a series of setbacks that India has suffered on the commodities front as a combination of stagnant yields, rising labour costs, tiny farms, low mechanisation and faulty government policies erode the country’s competitiveness in comparison with its South-East Asian rival.

Though it is no match for India in size and resources, Vietnam’s graph as a commodity hub has been steadily climbing. In the past five years, the country with a population of 90 million has, one by one, overtaken India in production and export of cashew, seafood, coffee and pepper. Very soon, it is expected to surpass India in rubber production as well.

The International Finance Corporation (IFC), a division of the World Bank, recently announced two investments totalling $40 million to aid Vietnam’s growing demand for trade and commodity financing.

Vietnam gets its edge from policies which link the entire value chain from production to the final consumer overseas and are designed to improve efficiency at each level, said PK Joshi, director (South Asia), International Food Policy Research Institute, a Washington-based think tank that helped the South-East Asian nation boost its rice production a decade ago.

“Vietnam has a policy for production that ensures timely delivery of inputs and high-quality services, a policy to create market linkages, and a very effective trade policy with clear strategies on how to target each market.

Together, this becomes a great recipe for success in the global commodity market,” Joshi added.

A decade ago, India was the world’s largest pepper producer, with an annual crop of 80,000 tonnes.

But while its annual production has declined to 48,000 tonnes, Vietnam’s has increased to 1.20 lakh tonnes, and it now exports almost five times more pepper than India.

A similar story was repeated in cashew nuts. India used to buy raw cashew nuts from Vietnam for processing and re-export, but soon Vietnam set up its own processing centres. Today, it exports around 1.70 lakh tonnes of cashew kernels versus 1.10 lakh tonnes by India

Higher productivity has taken Vietnam past India in the global seafood market as well. “Vietnam has gone in for intensive cultivation. While we have touched $3.5 billion in seafood export, they have crossed $5 billion,” said Anwar Hashim, managing director, Abad Fisheries.

The shrimp, Vannamei, currently a top money-spinner in the world market, is a good example of how India has lost the race. “Vietnam’s production of Vannamei is around 75,000 tonnes while we are at 30,000-40,000 tonnes. In Basa, which is widely consumed as fillets, Vietnam has a productivity of 250 tonnes per hectare, while we are at 20 tonnes,” added Hashim.

In rubber, too, India’s position as the fourth-biggest producer is under threat from Vietnam’s faster growth. Last year, its production grew 8% to 8.12 lakh tonnes and it is slated to rise by 6% this year to 8.6 lakh tonnes.

In comparison, India’s rubber production rose by 4.9% to 8.93 lakh tonnes in 2011. It is expected to slow down to a mere 4% and reach 9.27 lakh tonnes this year.

Vietnam may overtake India by 2015, given its current rate of growth, said Jom Jacob, senior economist at the Kuala Lumpur-based Association of Natural Rubber Producing Nations.

“They are going for high-yielding clones to enhance production. Nearly half the plantations are state-owned and are run efficiently,” he added.

To stay in the reckoning, India needs to get its policy act together. “India is only targeting production. It is not thinking of marketing and it has nothing for trade.
We need to stop this piecemeal approach if we wish to stay competitive,” said Joshi.